The Dishonest Economy

Off the Books: The Rise of the Underground Economy

by Philip Mattera

St. Martin’s, 160 pp., $25.00

Choosing the Right Pond: Human Behavior and the Quest for Status

by Robert H. Frank

Oxford University Press, 306 pp., $22.95

When Americans look at the underground economy in the Soviet Union and other communist countries many of them do so from a perspective of American moral superiority. Since an economy run on communist principles cannot supply the jobs, goods, and services that its people need, they say, otherwise law-abiding citizens are forced to retreat into the underground illegal economy. As producers they must violate the law to meet their state-imposed production quotas; as consumers they must buy on the black market or violate the law in other ways to get what they want. The existence of an underground economy within the Soviet bloc proves that communism does not work. It is economically and ethically bankrupt.

What then is one to conclude when one notices a similarly large underground economy within the United States, an economy in which producers and consumers do not report income, pay taxes, or observe the laws regulating business? Philip Mattera’s study of underground economies cites experts who claim that the underground economy within the Soviet Union may produce as much as one tenth of its GNP. In an excellent chapter on the size of the underground economy within the United States he concludes that America’s underground economy accounts for 8 to 10 percent of its GNP. This includes many thousands of workshops, stores, construction projects, even small factories, whose owners and employees avoid most taxes and pay no attention to government regulation. Those who maintain that the underground economy proves the moral bankruptcy of communism as it is practiced in the Soviet Union might ask whether the underground economy proves the moral bankruptcy of capitalism as it is practiced in the United States. It too seems unable to deliver the jobs, goods, and services its people need and they too have retreated into the underground economy to get what they want.

In Mattera’s view, today’s underground economy in the US is necessary to provide the jobs that the legal economy is failing to provide. Mattera believes that the “informal economy,” with its “off the books” jobs and businesses, “is an aspect of the contemporary crisis of capitalism.” It “provides some gainful opportunities for those people [the unemployed] who might otherwise have to rely on increasingly unreliable government support.” “A profound power shift in class relations is taking place and the informal economy is contributing mightily to it.”

The underground economy, moreover, “offers, at least for some people, the closest thing available to that free choice of activity…. It does not compare with the traditional left-wing vision of a completely free and abundant society, but it does have the advantage of being readily available.”

The refusal to make some separation between the underground economy (legal activities carried out in illegal ways) and crime (illegal activities) makes it impossible to see the former in relationship to the current crisis of the economy as a whole…. The informal economy is important as a transformation of mainstream activities of modern capitalist society rather than as an …

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